Eurozone inflation rises but it won't derail ECB rate cuts
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Eurozone inflation climbed above the European Central Bank’s (ECB) 2% target, though officials are unlikely to be deterred from continuing to lower interest rates next month and beyond.
Consumer prices rose 2.3% from a year ago in November, up from 2% in October and matching the median estimate in a Bloomberg survey of analysts. Energy base effects were a big contributor to the advance, while services-cost increases stayed elevated, Eurostat.
Prices of non-energy industrial goods quickened for a second month.
Closely watched core inflation, which excludes volatile food and energy prices, defied predictions that it would also edge higher, holding instead at 2.7%.
As measured by an estimate of the Harmonised Index of Consumer Prices, Ireland had the lowest inflation rate across the eurozone during November at just 0.5% — up from 0.1% in October. Among the highest recorded was Belgium at 5%, Croatia at 4%, and Estonia as well as the Netherlands both tied at 3.8%.
The uptick in the headline number was expected, according to ECB Vice President Luis de Guindos, though he expressed caution over services prices.
“We are confident that inflation will continue to drop,” he told an event in S’Agaró, Spain. “But the context of uncertainty is very intense.”
ECB officials have telegraphed a fourth quarter-point rate reduction of 2024 at their final policy meeting of the year in less than two weeks. While more moves will follow, the timing is clouded by stubborn pockets of inflation, and factors such as the Federal Reserve’s own monetary-easing plans following Donald Trump’s re-election.
The ECB’s more dovish policymakers, such as Greece’s Yannis Stournaras and Portugal’s Mario Centeno, worry that Europe’s weakening economy risks inflation undershooting the 2% goal. They’ve intensified calls to rapidly bring the deposit rate, currently at 3.25%, to 2% — a level seen by them as neutral, so neither restricting nor stimulating growth.
France’s Francois Villeroy de Galhau even said that the ECB may need to take borrowing costs into expansionary territory to promote growth, echoing recent comments by his Italian counterpart Fabio Panetta.
Investors appear to share similar concerns: A key market gauge of medium-term inflation expectations dipped below 2% this week for the first time since 2022.
Hawks like Bundesbank President Joachim Nagel, however, are more cautious — warning against rushing further rate cuts due to sticky services-sector inflation, elevated wage increases and huge geopolitical uncertainties.
The Eurostat data showed that services inflation inched lower, to 3.9% from 4%, but remains far too high for many Governing Council members.
Executive Board member Isabel Schnabel said borrowing costs are already close to neutral and it doesn’t currently seem appropriate to go lower to stimulate the economy.
New ECB projections in December for growth and prices will be key to determining how aggressively policy is loosened. While some officials reckon 2% inflation will be reached already in early 2025, recent European Commission forecasts that it will take longer.
Mr Trump’s return adds to the uncertainty. While most ECB policymakers agree that trade tariffs would dent growth in Europe, the effect on prices is less clear. President Christine Lagarde said this week that it would be “a little net inflationary in the short term.”